It is a dangerous world right now for CMBS financed real estate investors. 2017 is expected to bring in a record number of defaults. Much of those defaults are simply the result of bad timing. Loans financed at the height of the real estate market in 2007 are coming due today. (Most CMBS borrowers have 10 year interest only notes.)
New rules for commercial mortgage backed securities lenders aren’t helping either. Major rule changes often cause hesitancy among lenders in the short term.
Now there is a new problem... the demise of bricks and mortar big box retailers. Sears, Macy’s and JC Penney are all expected to close many stores this year.
The asset based lender publication, ABL Advisor, said yesterday that it expects a “retail apocalypse.” Even if not true, words like that are certain to scare away lenders and make it more difficult for CMBS borrowers to refinance.
According to an article by ABL Advisor, there is “sweeping distress in the retail sector.” One major lender, Credit Suisse, believes that up to 25% of America’s malls will close over the next five years. Others say the number may be nearer to 30A%. Forget about individual store closings, experts are talking entire malls shutting down.
Morningstar’s CMBS desk says, “We are most concerned about class B malls, particularly those in secondary and tertiary markets. When anchors close in these malls, it can be difficult to find tenants to backfill the space.”
As noted by Morningstar, when a mall loses an anchor tenant, that mall often deteriorates quickly. Finding new anchor tenants can be difficult, particularly in older mall properties.
The loss of an anchor tenant such as a Sears often sets off a cascade of problems. Many savvy tenants have built in provisions in their leases that allow them to cut back on payments if the mall falls below a certain occupancy level. Just when the mall most needs it cash to make improvements in the hope of attracting new tenants, its rent roll plummets.
The commercial real estate news is filled with doom and gloom reports. We regularly report some of those stories on this blog. It is important to remember, however, that if 25% or 30% of malls fail, the majority will somehow remain open.
There are steps that CMBS borrowers should take now before their note comes due. Waiting until the due date is not an option. We have talked to numerous borrowers who exhibited false confidence that their note would be renewed. The theory goes that since the property positively cash flows, lenders will be lined up to refinance. Often the reality is quite harsh.
The trusts that hold these loans are not banks. The promoter that put the deal together years ago is long gone. And borrowers find themselves at the mercy of special servicers. Companies like LNR Partners and CW Capital.
Unfortunately, main stream media is reluctant to use harsh words about special servicers. In our opinion, they are vicious sharks. If they sense blood in the water they will attack.
Although servicers are supposed to look after the best interest of the note holders (the Trust), they often advance their own agendas. It is no surprise that some special servicers will try to acquire valuable property for their own portfolio. And they don’t like to pay fair market value. Instead they put the property in default, run up ridiculous fees and then acquire the property for a song at auction.
Help for CMBS Borrowers
Do you own a property financed by commercial mortgage backed securities? Call us. We have represented over 100 borrowers. Even if the property is underwater we can still help protect you against deficiency actions and personal liability. Sometimes we can help negotiate a “hope note” that offers a possibility of future payout.
Our two takeaways in this post are don’t wait before seeking representation and don’t just walk away. The retail market may be sagging but owners of mall properties shouldn’t give up.
MahanyLaw and Judge, Lang & Katers – Lawyers for CMBS Borrowers
Most lender liability lenders represent banks. They also charge $500 or more per hour. We are different. We don’t represent banks. We don’t represent special servicers or trustees. We offer Midwest rates and service and our practice is geared towards property owners and borrowers.
Need more information? Visit our CMBS Refinance Information page for more details on the many services we offer to CMBS borrowers. You can also contact attorney Chris Katers at [hidden email] or by phone at (414) 777-0778. The author of this post, attorney Brian Mahany, can be reached at [hidden email].